Updated Quilt Chart through Q2 2024

VTS Community,

As we continue with our performance review of the first half of 2024, let's take a look at the updated "quilt chart" of all our active strategies.  A quilt chart is a great way to see a snapshot of performance all presented together so a few trends and comparisons can be readily made.

A quick note on VIX Options

Whenever I show a quilt chart, I do include my VIX Options Strategy.  This is NOT an active strategy within VTS, never has been.  It's a complex Options strategy I've been running every month since 2011, but with 20-30 trades per month including intraday, it's impossible to give trades signals to a community through email.

However, since it's discussed so much on our livestreams whenever we're specifically talking about my Options trading, it actually reduces the amount of follow up email questions I get to just include it in the chart.  If I don't, I'll get dozens of emails about it anyway so this just saves me time  :)

* Of course it will be one of several strategies that will be included when we relaunch the VTS Options Academy.  VIX Options, along with Wheel of Fun, Volatility Step, and a few other favourites will return in our separate Options Academy as soon as I finish the open projects at VTS.

Quilt chart updated through June 2024:

Now remember, it's not possible to calculate overall Total Portfolio Solution performance based off this chart, that's not its purpose.  Allocations have not been the same over time, some strategies have been weighted higher than others, and there's been other active strategies in the past that were part of the portfolio that no longer are.  One that most will remember is the Tactical Balanced Strategy, which was an original back from 2012 all the way to a couple years ago when we shifted away from Bonds and no longer need that strategy.  

The point is this is just a snapshot of annual performance of individual strategies to get a feeling for some overall trends.

Tech is still king

It's pretty clear that since the Covid pandemic in 2020, the tech sector has been the most interesting of all.  It's either on fire, or on FIRE.

Three out of the last four years the Defensive Rotation Strategy was our top performer, and in the other year it was our worst.  That sums up in general the history of the tech sector, at least going back to the 90's.  There are times when it's the only thing propping up the market, and we could loosely say that's true this year because if you remove the largest 5 or so names from the S&P 500 the performance isn't great.  However, tech can also be a disaster, as we saw with the dotcom crash that saw a -78% collapse in the Nasdaq which on an inflation adjusted basis took about 17 years to recover from.

This is why it's so important for our Defensive Rotation Strategy to have a safety mechanism to move to Utilities or Cash in a crisis.  We want to participate in the tremendous opportunity that the tech sector provides, and even do it with 2x leverage.  But we also have to be mindful of the fact that when it goes, it can really crash hard.

The Short Vol trade isn't dead, just resting...

As you can see in the quilt chart above, our Tactical Volatility Strategy which officially launched in January 2012 had a fantastic run up to 2018.  What happened that year?  Volpocalypse on February 5th, 2018 of course, the largest Volatility spike since the 1987 stock market crash.

Now remember, we were in cash during Volpocalypse and didn't lose any money in February, but that event really shocked the market to its core and in some ways, the Volatility space still hasn't recovered from it.

Our Tactical Volatility Strategy performance in the years since 2018 has still be great, but not quite to the "golden years" of the Short Vol trade.  I'm glad I was a pioneer in the Volatility space to capitalize on that stretch, but trust me it's far from over.  There have been other periods through history that would not have been kind to the Short Volatility trade either. 

For example, even though Volatility ETFs didn't exist before 2009, if they had, the years from about 1996 through 2000 would have been brutal for anyone trying to trade them.  The combination of a raging stock market and surprisingly high Volatility through those years would have been problematic to say the least.

The Short Volatility trade ebbs and flows, and I'm quite sure we will see another stretch of performance like the past.  Also, the strategy is double sided with potential allocations to Long Volatility to capitalize from a crisis.  Perhaps the next "golden age" of Volatility Strategies will be us using the Long Volatility aspect to crush the market, we'll see...

Our diversification strategies should be on the low end

Our Iron Condor Strategy and Volatility Trend Strategy, while completely different in structure, can both be placed in the same category within our Total Portfolio Solution.  They are both strategies designed to increase diversification and smooth out drawdowns when the overall stock market is not performing as well.

Iron Condor Strategy correlation to S&P 500:  0%

Volatility Trend Strategy correlation to S&P 500:  -9%

I will talk about this in much more detail in an upcoming article, but there are very few asset classes in the world that have zero or negative correlation to the stock market.  In a practical sense, we're really just talking about bonds and gold here.  In both those cases of bonds and gold, they have a long-term CAGR that is quite unimpressive.  That's to be expected.  Since the stock market largely goes up, bonds and gold are just there to smooth things out, and the penalty of that is they are performance drags.

Our Iron Condor Strategy and Volatility Trend Strategy however, both have strong long-term performance.  16% and 13% CAGR respectively.  That's pretty great for strategies designed to be counter to the market, so they definitely add significant value in the area of preserving investors emotional capital.  Granted, on an absolute basis they do underperform our other tactical rotation strategies.  However, in my humble opinion, their value should not be ignored.

Stocks at all time highs can cloud judgement

Most investors overestimate their risk tolerance.  In good years it may be tempting to say, why even bother with a diversified portfolio?  Why not just go all in on our top performers?  Why not just go 50% Tactical Volatility and 50% Defensive Rotation?  Well, you could, and I'll talk about that too in an upcoming blog. 

For me though, I very much value consistency and lower drawdowns as I fully understand investing is a multi decade process.  Chasing big gains does run the risk of a punishing drawdown in a bad year, which if the investor pulls the plug they will not be around to enjoy the good times afterwards. 

Nothing kills forward progress more than selling out at a bottom, which is why my top priority is always to give people a portfolio they can invest in for the long run that won't cause them to make an emotionally charged mistake and pull the plug.

I'm providing a portfolio that IF people follow it for decades, they will look back and appreciate how much value it added.